The HK$1.22 billion ($156 million) flotation of China Resources Peoples Telephone was finally completed by lead manager UBS on Monday after being almost completely stymied by collapsing sentiment in the Hong Kong IPO market.
On Friday, when the 268.5 million share deal was scheduled to price, it was rumoured to be heavily undersubscribed. In the end, the retail order book amounted to only 5.3% of the total deal (14.33 million shares), compared to an initial 10% threshold.
The institutional order book scraped home, but only after corporates took up 70%, with institutions accounting for just 30%. About 50 corporate and institutional investors participated in total.
UBS itself also waded in to support the deal by taking up 8%, equivalent to 21.48 million shares.
Unsurprisingly the offering was priced at the very bottom of its price range at HK$4.55 per share. Co-leads are ABN AMRO Rothschild and CLSA.
At this level, the deal was priced at 10.7 times 2004 earnings. This represents a roughly 16% discount to Smartone, which has a similar number of subscribers to Peoples, but slightly higher profitability and a 3G license. There will be a 6.4% dividend yield.
"This deal left everyone in a real quandary," says one observer. "Investors were saying the valuation was ok if a little on the expensive side, but there was no way they were going to buy an IPO when market sentiment has dropped like a stone? It was quite surreal really. Investors thought the company was fine, but demand never materialised."
Aborting a deal for a market heavyweight like China Resources would not have been a palatable prospect for the lead. Pricing below the indicative range would also have been difficult given this would mean re-filing the prospectus and endangering what little momentum there was by delaying for another week.
Instead, one observer speculates that Peoples managing director, Michael Leung, spent much of the weekend calling his friends in the corporate world to drum up support. It is also to the lead's credit that it was prepared to stand by its client and try to keep the Hong Kong IPO market alive. It had a 3.5% fee cushion.
"The deal was not hard underwritten. There was no legal obligation for UBS to take 8% of the deal," notes one specialist, adding that the bank will make a public announcement about the deal in the local press today (Tuesday), despite being under the 5% ownership limit of the whole company.
Since Peoples started pre-marketing, the Hang Seng Index has lost 150 points after briefly touching 14,000 points at the beginning of March. While the HSI has dropped 3.3%, China stocks have fared even worse, down 5% over the same period.
But it is the poor performance of recent IPOs by SMIC and Tom Online, which has really killed the market. The bursting of the China IPO bubble has led SMIC to slide 15.5% from its issue price, although it had lost up to 23% at one point, while Tom Online is down 24.6%.
"About $1.4 billion left Asia between March 15 to 19 according to the latest figures," says one specialist, "and you can see trading volumes on the Hang Seng are sharply down too."
In addition to the new shares being sold - 149 million shares, three strategic investors also completely sold their stakes. Holland's Royal KPN, Sweden's TeliaSonera and South Africa's Celtel respectively sold 8%, 8% and 4%.
"These guys originally came in to provide technical support, but since they've only been financial investors for a number of years, it made sense for them to pack up," argues one specialist.
Indeed, the core investors, China Resources, which holds 60% of the company, as well as managing director Michael Leung, who owns 20%, did not sell down any shares.
If the 15% greenshoe is exercised, the company's free float will be 37.9%, otherwise the free float will be 36.11%.
